Douglas Carswell's Blog

Watch Japan carefully

Japanese bond yields spiked this week.

"So what", you say. "Why should the return that investors get for lending the Japanese government money concern us?"

Because our own government has adopted the kind of monetary stimulus approach they've had in Japan for years.  Interest rates have been kept low, zombies kept alive - and no growth.  Sound familiar?

It's not just that monetary stimulus doesn't work.  It has been immensely harmful, clogging up the economy with malinvestment.

Even worse, no matter how many times the government pumps more candy floss credit into the system to keep things afloat, it is unsustainable. When that moment arrives, I fear it might start in Japan and look something like this:  

Japanese bond yields spike.  Yields rise elsewhere as investors grow reluctant to keep taking on government IOUs.   

The bond bubble bursts, and it becomes painfully clear that we've only been issuing bonds at record low rates by, in effect, rigging the market.  

We then wake up one morning and find that whoever is in office faces a choice: much less money for the state-sector, or printing money and high inflation.  Or both.

One day, I fear this might happen.  So when Japanese bond yields rise, pay attention.

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